'We cannot
be complacent': G20 leaders warned
Jul 15, 2020 – 11.00pm
The chairman of the Financial
Stability Board has told global central bank governors and finance ministers
ahead of a weekend meeting that the path of recovery from the COVID-19 crisis
"is still uncertain, with a high likelihood of starts and sputters along
the way".
Randal Quarles, also the US Federal Reserve's vice-chairman
for supervision, said in a letter to the world's economic leaders the pandemic
had taken an "unprecedented economic toll" and "we cannot be
complacent". "The crisis is far from over and we must not lose sight
of the hard work we must do together to support global recovery," he said.
Economic leaders and central bank governors of G20 countries
will conduct a virtual meeting on Saturday, to discuss looming risks in the
global economy, including liquidity and loan loss stress in the banking system
and the impact of credit rating downgrades.
The global hook-up comes ahead of Reserve Bank governor
Philip Lowe's address to the Anika Foundation next Tuesday, a speech by APRA
chairman Wayne Byres on Wednesday, and the government's economic and fiscal
update on Thursday.
Mr Quarles said the crisis has
validated post-GFC financial reforms to improve bank resilience, allowing banks to act as shock
absorbers rather than amplifiers, and markets had been
responsive to "quick and decisive policy actions" including emergency
support from central banks.
Corporate debt challenge
Other positives included the use of bank equity buffers to
both absorb losses and support lending – which the Council of Financial
Regulators has been encouraging in Australia – which he said is
"consistent with a well-functioning, prudently managed banking system and
with the design and intended functioning of the Basel III framework".
Supervisors would give banks "sufficient time to
restore buffers, taking account of economic and market conditions and
individual bank circumstances", he said.
Amid the political dislocation in his native US and growing
international trade tensions, Mr Quarles urged financial governors to maintain
a collaborative approach. "Authorities across the financial sector must
develop a shared understanding of our financial system as a whole and build
consensus where policy responses may be needed," he said.
The FSB, an international oversight body for the financial
system that reports in to the G20, has begun mapping the critical connections
between traditional banking and non-bank sectors to clarify "various
points of vulnerabilities and risk amplification and transmission in the
financial system".
One particular challenge is high levels of debt in parts of
the corporate sector, which have increased as some companies have borrowed more
to navigate the crisis, raising solvency concerns for some borrowers.
Global regulators are also grappling with the risk of
further liquidity stresses and bracing for volatility in markets, which has
subsided recently, to return.
"We may be seeing significant pricing disconnects
between the market and economic fundamentals, which could result in sudden and
sharp repricing," Mr Quarles said.
"The impacts of these economic strains may be amplified
in emerging markets, given the risks to their currency and debt markets from
capital outflows."
The FSB report on financial stability measures taken during
the crisis comes as S&P Global Ratings said on Wednesday that risks for
Asia-Pacific banks are "firmly on the downside", with the region set
to lose $US2.7 trillion of economic output in 2020 and 2021.
"The extent of defaults from borrowers, and banks'
credit losses, will become clearer when governments unwind fiscal support, and
banks end their loan repayment moratoriums," said S&P credit analyst
Sharad Jain.
"We expect most institutions in the region will show a
multi-fold rise in credit losses and a sharp drop in earnings in the next two
to three years, due to the COVID-19 induced economic downturn."
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